Depreciating significant parts separately
When a client must depreciate the significant parts of one asset separately under IAS 16, how to split a register entry, and how to document it.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client buys an office building and records one asset called "Building". A single straight-line charge follows, year after year. Then the lifts are replaced, the roof is redone and the air-conditioning plant gives up. Each replacement is either expensed as an enormous repair or piled on top of a building whose original lifts are still sitting, undepreciated, inside its cost.
The fix lies at the start, in how the asset was recorded.
IAS 16's rule on significant parts
ACCA explains that IAS 16 requires each significant part of an asset to be depreciated separately. The same ACCA article notes that useful life and residual value estimates must be reviewed at the end of each reporting period, with significant changes accounted for over the remaining useful life as a change in estimate.
The logic follows from what depreciation is. Investopedia defines depreciation as an accounting method that allocates the cost of a tangible asset over its useful life, reflecting its decreasing value through use and obsolescence. If an asset is made of parts with very different lives, one life for the whole cannot allocate the cost properly, because the parts wear out on their own timetables.
IAS 16 describes property, plant and equipment as tangible items held for use in producing or supplying goods or services, for rental to others or for administration, and expected to be used during more than one period. The significant-parts rule applies across that whole category, not just to buildings.
Examples from client files
- A building. The structure lasts a long time. The roof, lifts, air-conditioning plant and electrical installation each last a shorter, different period.
- A truck. The chassis and the engine may have different lives, and a transport client may treat a fleet's tyres separately again.
- An aircraft. The airframe, the engines and the cabin interior are the textbook case, because interiors are refitted several times during an airframe's life.
- A factory line. The main machinery and the moulds or tooling that wear out and are replaced regularly.
"Significant" is a judgement. A part matters when its cost is significant within the whole and its life differs from the rest. Small parts with similar lives can sensibly be grouped.
Splitting one register entry into components
When an asset is bought or built, split its cost into components at that point. Sources for the split include:
- the contractor's or supplier's breakdown of the price;
- a quantity surveyor's report for a building;
- the current cost of replacing each part, as a basis for sharing out the total;
- the client's maintenance history, for the life of each part.
For an existing asset carried as a single item, the split can be made at the next major replacement. When the roof is replaced, estimate the carrying amount of the old roof still inside the building's cost, take it out, and add the new roof as a component of its own. Document how the estimate was made.
For clients that keep their own books on Achekam, the fixed-asset register lets a business add assets at cost, depreciate them monthly by straight line or reducing balance with a journal each month, and dispose of them with the profit or loss posted. Recording each significant part as its own asset in that register means the monthly journals already reflect the split, and a replaced part can be disposed of on its own. The register does not work out tax wear-and-tear, and it is not part of Business Essentials. How the client's register feeds the firm's work is covered in the client's fixed asset register.
What the Studio does with the result
Achekam's Financials Studio does not calculate depreciation. It takes the depreciation in the trial balance as it stands, raises a flag when the charge and the movement in accumulated depreciation disagree, and lets staff post a year-end adjusting entry. A wrong adjusting entry is reversed with a record of who and why, never deleted.
For component accounting that division of labour is sensible. The split, the lives and the methods belong in the register, where the detail lives; the Studio checks that what arrives in the trial balance hangs together. When a component is replaced and the old part is taken out, the movement in accumulated depreciation will no longer match the charge, and the flag prompts the preparer to confirm that the difference is a disposal rather than an error. More on that flag in depreciation in the statements.
Documenting the component judgement
A reviewer will ask why the building has the components it has, and not more or fewer. The file should show:
- the components identified and the basis for splitting the cost;
- the useful life and residual value of each, and where those estimates came from;
- the reasoning for grouping parts with similar lives;
- the annual review of lives and residual values that ACCA notes IAS 16 requires;
- the method chosen for each component, a choice discussed in choosing a depreciation method under IAS 16.
ACCA's article on measuring and depreciating property, plant and equipment explains the initial measurement and depreciation of property, plant and equipment under IAS 16, including the separate depreciation of significant parts.
Where to start with an existing client
Few clients will rebuild a register overnight. Start with the assets where the error is largest: buildings carried as a single figure and vehicle fleets with major overhauls. Split them at the next replacement, document the reasoning once, and carry it forward. Within a few years the register will describe the assets as they actually wear out.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
